Guaranteeing Agribusiness Lending in Indian Country

Spring 2020

Client: Intertribal Agriculture Council, as part of the Harvard Project on Indian Economic Development

Team Project

In this project, a classmate and I produced a policy white paper for the Intertribal Agriculture Council evaluating the concept of a federal guarantee on agricultural loans made by Native CDFIs. The introduction I wrote is below.

Native CDFIs (Community Development Financial Institutions) are among the best equipped organizations to support tribal economic development, and their customer-centered approach has delivered positive results that support borrowers both through times of success and in times of hardship. Their innovative lending practices, grounded on principles of patient capital, fall outside the standard regulatory frameworks of conventional commercial banks. In the meanwhile, existing loan guarantee programs, which as explained later would theoretically allow institutions’ capital to be redeployed more freely, impose requirements that counter Native CDFIs’ mission-driven modus operandi. In the sphere of agricultural production and its ancillary supporting enterprises, the potential reach of Native CDFIs is vast: land counts as most reservations’ largest asset, yet unlocking tribal land for agricultural production is limited by insufficient access to outside funds, despite local political and entrepreneurial support among tribal citizens.

Without access to loan guarantees, Native CDFIs face two simultaneous challenges. First, to account for the financial risk inherent in any lending, they hold cash in loan loss reserves in case of extreme loss. The opportunity cost is that this capital cannot be further invested in other beginning ranchers and existing operators seeking to leverage their expertise and business skills. 

Second, because their practices differ from the mainstream regulatory strictures of commercial banks, raising additional capital becomes a barrier. Practitioners whom we interviewed communicated that outsiders often view reservations and tribal governments with misunderstandings (for instance, the mistaken notions that trust land, described later, cannot be alienated, or that having to operate within a tribal court system increases the likelihood of financial loss). Consequently, mission-driven investors or outside lenders may impose unrealistic requirements on their equity contributions, charge overbearing interest rates, or decline to invest at all. As a result, the pool of potential funds for investment becomes limited to existing philanthropic organizations in a given region, or to outside programs such as NACA (Native American CDFI Assistance Program) grants.

We therefore argue that a federal loan guarantee for the lending activities pursued by Native CDFIs for agribusinesses in Indian Country. Guaranteeing agricultural loans by Native CDFIs would mean that these organizations can: